Poland's nuclear plan seen coming unstuck by finances

By bne IntelliNews February 7, 2014

Wojciech Kosc in Warsaw -

The Polish government hailed the adoption in late January of a programme to develop nuclear energy as a decisive step towards the construction of two power plants by the mid-2030s. But the political decision to adopt the 152-page document was the easy part; finding the financing is likely to prove more difficult.

Under the programme, Poland will build two 3,000-megawatt (MW) nuclear plants of by 2035. Drawing on the cost estimates of 11 new nuclear plants underway in the US and Europe, the government assessed the cost at PLN40bn-60bn (€9.5bn-14.3bn).

Poland's biggest energy company, the 61% state-controlled Polska Grupa Energetyczna (PGE), has been tasked with leading the project. But the nuclear programme will stretch the finances of an already hard-pressed utility, which has been pressured by the government to push on with a 1,800MW, PLN11bn coal-fired plant in Opole. PGE is also a key member of a group of state firms picked by the government to explore for shale gas in northern Poland.

To ease the burden of the nuclear project, PGE entered into a loose agreement in the autumn of 2013 with three of its state-controlled siblings - energy firms Tauron and ENEA as well as copper and silver mining group KGHM - to sell a 10% stake in nuclear power unit SPV to each. While one condition for the agreement to go ahead - namely, the adoption of the government programme - has now been met, it still requires the green light from the boards of the three partners.

According to Tomasz Chmal, an energy expert with the Sobieski Institute, having state firms cooperate on such an expensive project might not work. "A similar effort about shale gas fell through. Unless there's a stable political and regulatory environment, pressing companies to go into the nuclear project won't be effective," he says.

Guarantees required

Politics aside, the government document only gives very general guidance on how PGE is going to secure the billions required for the nuclear project. The programme says that development of nuclear power installations will have to involve a strategic investor "after the establishment of the domestic consortium [with Tauron, ENEA, and KGHM]".

The identity of that strategic investor remains unclear. In the ongoing nuclear project in Lithuania, for example, the strategic investor will be Hitachi, the provider of the technology. In September 2011, PGE held a conference with several leading nuclear power technology providers, but the results were not made public. Westinghouse, GE-Hitachi, Mitsubishi, Korean Power Electric Corp, Mitsubishi, Areva, Atomic Energy of Canada and ATMEA - a joint venture between Areva and Mitsubishi Heavy Industries - took part.

The government document says state support will be necessary, in the form of credit guarantees from the treasury and regulatory solutions that will ensure the plants' profitability. To complete the financing, loans could come from multilateral institutions such as the European Investment Bank, the European Bank for Reconstruction and Development, or EU nuclear agency Euratom.

Chmal suggests the government might look toward the UK for inspiration. London is working to convince the European Commission to approve a support instrument known as Contracts for Difference (CfDs). CfDs guarantee the purchase price of energy, with the state paying the difference if the price falls below a certain level.

However, on February 3 the Commission issued a scathing report on the UK proposal. It argues that "the CfD effectively insulates NNBG [the subsidiary created by EDF Energy to build and operate the nuclear power stations in the UK] from the market".

Says James de Candole of Prague advisory firm Candole Partners: "The Commission dismisses every single argument put forward by the UK government to justify the scheme, in a written masterpiece of impeccably controlled intellectual scorn. I would not normally recommend anyone to read a European Commission document, but this one is diamond-sharp."

Price of failure

Other analysts point out that the current weakness of European power prices are likely to make the financing of Poland's nuclear energy ambitions tricky. "A nuclear plant has a lifespan of about 50 years. For the investors to get their returns, the energy price should be at PLN300 (€71) [per megawatt hour] throughout the plant's lifespan. It's currently at around half that price," one London-based analyst tells bne on condition of anonymity.

However, according to Chmal, new power generation installations aren't just commercial ventures. "Company balance sheets aren't everything. There's energy security of the country as well," he says.

At the same time, he notes the Polish government's energy policy offers additional risk. "The government must ensure stable market conditions, but also - and it's even more important - a stable political situation, i.e. that the next government won't back out from the project. The problem is there's hardly any discussion about the project between the government and the opposition," Chmal says. "Give the project a stable environment and money will be found," he believes.

A factor contributing to the government's relentless pressure on PGE - which is controlled by the state but also listed on the stock market - is that Poland's power generation capacity is being squeezed. On the one hand, the country's power infrastructure is ageing; on the other, EU policy to reduce emissions regularly clashes with coal-happy Poland.

According to Jan Haverkamp, Greenpeace's nuclear energy and energy policy expert, plumping for nuclear power as a means of reducing emissions is misguided, because it's too expensive compared with the potential. "[SPV] will not be strong enough to find finances on the markets for this. They will need a strong support in the form of guaranteed fixed (high and long-term) prices and at least a partial government guarantee, as well as some form of hedging against cost rises and construction overruns. I don't think that is all feasible," he says. "It would be much better and cheaper to invest in renewables."

The renewables push, however, remains in limbo in Poland, with the government struggling to adopt a new support law for over three years now. Virtually the only certainty about Poland's energy strategy is that in most of the long-term scenarios, coal will remain the staple of the Polish energy mix.

Despite the challenges, Warsaw's recent adoption of the nuclear programme signals a determination to try to push the project through. Work on the first unit of the first plant is slated to begin by 2019. The full plant is planned for completion in 2030. Construction of the second plant will begin in the meantime, to finish in 2035.

Poland's nuclear complex will be located in either Choczewo or Zarnowiec, both in northern Poland. Zarnowiec was the site of Poland's first attempt to develop a nuclear facility in the 1980s, using Soviet technology. That project was abandoned in 1990, in the fallout of the Chernobyl disaster of 1986 and protests of local residents and green activists.

Notice: Undefined index: social in /var/www/html/application/views/scripts/index/article.phtml on line 259

Related Articles

Latvia’s Citadele Bank pulls IPO

bne IntelliNews - Latvia's Citadele Bank has postponed its initial public offering (IPO), citing “ongoing unfavourable market conditions”, the bank announced on November 11. The postponement ... more

BOOK REVIEW: “Europe’s Orphan” – how the euro became a scapegoat for policy ills

Kit Gillet in Bucharest - The euro, conceived as part of a grand and unifying vision for Europe, has, over the last few years, become tainted and often even blamed for the calamities that have ... more

Mystery Latvian linked to Scottish shell companies denies role in $1bn Moldova bank fraud

Graham Stack in Berlin - A Latvian financier linked to the mass production of Scottish shell companies has denied to bne IntelliNews any involvement in the $1bn Moldovan bank fraud that has caused ... more